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OBAF > SEC Filings for OBAF > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for OBA FINANCIAL SERVICES, INC.

Form 10-Q for OBA FINANCIAL SERVICES, INC.


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL REVIEW

The principal objective of this Financial Review is to provide an overview of the financial condition and results of operations of OBA Financial Services Inc., and its subsidiary, OBA Bank. The discussion and tabular presentations should be read in conjunction with the accompanying unaudited Consolidated Financial Statements and Notes.

Overview of Income and Expenses

Income

The Company has two primary sources of pre-tax income; net interest income and non-interest income. Net interest income is the difference between interest income, which is the income the Company earns on its loans and investments, and interest expense, which is the interest the Company pays on its deposits and borrowings.

Non-interest income is received from providing products and services and from other income. The majority of the non-interest income is earned from service charges on deposit accounts, bank owned life insurance income, and loan servicing fees. The Company also earns income from time to time from the sale of residential mortgage loans and other fees and charges.

The Company recognizes gains or losses as a result of sales of investment securities, foreclosed property, and premises and equipment. In addition, the Company recognizes losses on its investment securities that are considered other-than-temporarily impaired. Gains and losses are not a regular part of the Company's primary sources of income.

Expenses

The non-interest expenses the Company incurs in operating its business consist primarily of salaries and employee benefits, occupancy and equipment expense, external processing fees, FDIC assessments, Director fees, and other non-interest expenses.

Salaries and employee benefits expense consists primarily of the salaries and wages paid to employees and payroll tax, healthcare, retirement, ESOP, Equity Incentive Plan, and other employee benefit expenses.

Occupancy expenses, which are fixed or variable costs associated with premises and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance, and cost of utilities.

Equipment expense includes expenses and depreciation charges related to office and banking equipment.

Data processing fees are paid to third party vendors primarily for various data processing services.

Other expenses include expenses for professional services, including, but not limited to, attorney, accountant and consultant fees, advertising and marketing, charitable contributions, insurance, office supplies, postage, telephone, and other miscellaneous operating expenses.

Critical Accounting Policies and Estimates

There are no material changes to the critical accounting policies disclosed in OBA Financial Services, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Comparison of Financial Condition at September 30, 2012 and June 30, 2012

Assets. Total assets decreased $3.3 million to $388.8 million at September 30, 2012 from $392.1 million at June 30, 2012. The decrease was primarily due to a decrease in cash and cash equivalents partially offset by increases in loans and securities and a decrease in Federal Home Loan Bank advances.

Cash and Cash Equivalents. At September 30, 2012, cash and cash equivalents decreased by $16.9 million, to $14.6 million from $31.5 million at June 30, 2012 as securities available for sale and loans increased by $13.8 million and $1.8 million, respectively, while Federal Home Loan Bank advances decreased by $5.0 million.


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Loans. At September 30, 2012, total gross loans were $298.0 million, an increase of $1.8 million, as compared to $296.2 million at June 30, 2012. The commercial loan portfolio increased $5.0 million to $175.1 million at September 30, 2012 from $170.1 million at June 30, 2012 as the Company continued its focus on originating commercial loans. This increase was offset by decreases of $1.7 million and $1.4 million in the residential mortgage loan and home equity loan and line of credit portfolios, respectively. For further detail, see "Note 4 - Credit Quality of Loans and Allowance for Loan Losses" in the accompanying financial statements.

Allowance for Loan Losses.

The following table summarizes activity in the allowance for loan losses:



                                                   Three Months Ended
                                                      September 30,
            (in thousands)                         2012           2011
            Balance at beginning of period       $   3,035       $ 2,246
            Provision for loan losses                  112           147
            Charge-offs                                 (8 )          -
            Recoveries                                   1            15

            Balance at end of period             $   3,140       $ 2,408

            Ratios:
            Net charge-offs to average loans            -  %       (0.02 )%
            Allowance for loan losses to loans        1.05          0.85

At September 30, 2012, the allowance for loan losses was $3.1 million compared with $2.4 million at September 30, 2011 and $3.0 million at June 30, 2012. The allowance for loan losses as a percentage of total loans at September 30, 2012 was 1.05% compared to 1.02% at June 30, 2012 and 0.85% at September 30, 2011. Net charge-offs as a percentage of average loans was effectively zero percent for the three months ended September 30, 2012 and the Bank had a net recovery of 0.02% for the three months ended September 30, 2011. The Bank had $7.9 million in impaired loans at September 30, 2012 and June 30, 2012. Total impaired loans are primarily made up of two loan relationships with not-for-profit entities that have collateral values well in excess of the loan values. Based on the value of the collateral, no specific allowances are required for these loans. For further detail, see "Note 4 - Credit Quality of Loans and Allowance for Loan Losses" in the accompanying financial statements.

Non-performing Assets. Loans are generally placed on non-accrual status when payment of principal or interest is 90 days or more delinquent unless well secured and in the process of collection. Loans can also be placed on non-accrual status if collection of principal or interest in full is in doubt. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current, there has been a period of sustained performance (generally, six months), and full payment of principal and interest is expected. At September 30, 2012 and June 30, 2012, the Company had $6.1 million in total non-performing assets. Primarily, these totals represent commercial real estate and residential mortgage loans. Of the $6.1 million in non-performing assets the Company reported at September 30, 2012, $3.3 million were also troubled debt restructurings.


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The following table summarizes non-performing assets:

                                                September 30,        June 30,
       (dollars in thousands)                       2012               2012
       Non-performing assets
       Non-accrual loans:
       Commercial real estate                  $         5,080      $    5,080
       Residential mortgages                               891             891
       Home equity loans and lines of credit                75              75

       Total non-accrual loans                           6,046           6,046
       Other real estate owned                              40              40

       Total non-performing assets             $         6,086      $    6,086

       Asset quality ratios:
       Non-performing loans to total loans                2.03 %          2.04 %
       Non-performing assets to total assets              1.57            1.55

The non-performing loans to total loans ratio decreased slightly to 2.03% at September 30, 2012 from 2.04% at June 30, 2012 and the non-performing assets to total assets ratio increased two basis points from 1.55% at June 30, 2012 to 1.57% at September 30, 2012. For further detail, see "Note 4 - Credit Quality of Loans and Allowance for Loan Losses" in the accompanying financial statements.

Troubled Debt Restructurings. At September 30, 2012 and June 30, 2012, the Bank had $5.9 million and $5.8 million of modified loans, respectively, which were considered troubled debt restructurings. At September 30, 2012, the Bank had $1.0 million in residential mortgage loans that were considered troubled debt restructurings and $4.8 million in commercial real estate loans that were considered troubled debt restructurings. At June 30, 2012, the Bank had $1.1 million in residential mortgage loans that were considered troubled debt restructurings and $4.7 million in commercial real estate loans that were considered troubled debt restructurings. Of the $5.9 million in modified loans considered troubled debt restructurings, $3.3 million were also non-performing loans. For further detail, see "Note 4 - Credit Quality of Loans and Allowance for Loan Losses" in the accompanying financial statements.

Securities. At September 30, 2012, the securities portfolio totaled $50.4 million, or 13.0% of total assets, as compared to $36.9 million, or 9.4% of total assets, at June 30, 2012.

Deposits. At September 30, 2012, deposits increased $2.1 million to $271.7 million from $269.6 million at June 30, 2012. Total money market accounts increased $2.7 million and checking accounts increased $530 thousand while certificates of deposit decreased $1.3 million.

Borrowings. At September 30, 2012, total borrowings decreased $4.6 million, or 10.6%, to $38.8 million from $43.4 million at June 30, 2012. Repurchase agreements increased slightly to $16.9 million at September 30, 2012 from $16.4 million at June 30, 2012. At September 30, 2012, Federal Home Loan Bank advances totaled $22.0 million, a decrease of $5.0 million from June 30, 2012.

At September 30, 2012, the Company had access to additional Federal Home Loan Bank advances of up to $46.9 million.

Equity. Equity totaled $75.7 million at September 30, 2012 and June 30, 2012, respectively. At September 30, 2012, the Company had repurchased 80,694 shares of its common stock of the 208,294 shares approved in its second share repurchase program. The Company's Board of Directors adopted the second stock repurchase program as previously disclosed in the Company's 8-K filed on March 21, 2012.


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Capital and Liquidity. The Bank intends to maintain a strong capital position that supports its strategic goals while exceeding regulatory standards. At September 30, 2012, the Bank met the definition of a "well-capitalized" institution by exceeding all regulatory minimum capital requirements. The following tables summarize the consolidated and Bank capital ratios:

                                                          Ratios at
                                              September 30,            June 30,           "Well-Capitalized"
                                                  2012                   2012                  Minimums
Consolidated Capital Ratios:
Total Capital to risk-weighted assets                  28.82 %             29.06 %                         -
Tier 1 Capital to risk-weighted assets                 27.66 %             27.93 %                         -
Tier 1 Leverage                                        19.29 %             19.17 %                         -
Bank Capital Ratios:
Total Capital to risk-weighted assets                  23.51 %             23.42 %                      10.00 %
Tier 1 Capital to risk-weighted assets                 22.35 %             22.29 %                       6.00 %
Tier 1 Leverage                                        15.59 %             15.30 %                       5.00 %

The Company's primary sources of funds are deposits, borrowed funds, amortization, prepayments, and maturities of loans, investment securities, and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans and investments are a relatively predictable source of funds, deposit flows and loan and investment prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition, the Company invests excess funds in short-term interest-earning securities and other assets which provide liquidity to meet lending requirements.

The Company is a member of the Federal Home Loan Bank of Atlanta, whose competitive advance programs provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in liquidity could result in the Company seeking other sources of funds, including, but not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of available-for-sale investment securities, and the sale of loans or other assets.

Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011

General. Net income increased $172 thousand to $260 thousand for the three months ended September 30, 2012 from net income of $88 thousand for the three months ended September 30, 2011. The increase in net income was primarily a result of an increase in net interest income of $281 thousand and a decrease in the provision for loan losses of $35 thousand partially offset by an increase in tax expense of $148 thousand.

Net Interest Income. Net interest income increased by $281 thousand, to $3.3 million for the three months ended September 30, 2012 as compared to $3.0 million for the three months ended September 30, 2011. Total interest expense decreased $473 thousand, or 42.6%, to $637 thousand for the three months ended September 30, 2012 as compared to $1.1 million for the three months ended September 30, 2011. The decrease in interest expense was primarily the result of the Bank decreasing deposit rates while maintaining its competitive position within the local market, paying off all matured brokered certificates of deposit exclusive of the Certificate of Deposit Account Registry Service ("CDARS") program and several matured higher costing term Federal Home Loan Bank advances, and reducing the rate on customer repurchase agreements. Interest and dividend income decreased by $192 thousand to $3.9 million for the three months ended September 30, 2012 as compared to $4.1 million for the three months ended September 30, 2011. This decrease is primarily due to lower yields in the loan and investment portfolios, as well as, a decrease in lower yielding fed funds sold.

The net interest margin was 3.62% for the three months ended September 30, 2012 compared to 3.52% for the three months ended September 30, 2011. The increase in the net interest margin was primarily a result of an increase in average interest-earning assets and a decrease in the total interest-bearing liabilities average yield of 62 basis points as compared to a decrease in the total interest-earning asset yield of 50 basis points. Net interest-earning assets increased $34.9 million as average interest-earning assets increased $22.2 million to $357.6 million for the period ended September 30, 2012 compared to $335.4 million for the period ended September 30, 2011. Average interest-bearing liabilities decreased $12.7 million to $268.9 million for the period ended September 30, 2012 as compared to $281.6 million for the period ended September 30, 2011.


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Interest and Dividend Income. Interest and dividend income decreased $192 thousand to $3.9 million from $4.1 million for the three months ended September 30, 2012 and 2011, respectively, as continued low market interest rates caused lower yields on new loan production and an increase in loan refinancing. Interest income on loans decreased $167 thousand to $3.6 million from $3.8 million for the periods ended September 30, 2012 and 2011, respectively. Interest income on investments was down slightly to $270 thousand for the period ended September 30, 2012 as compared to $282 thousand for the period ended September 30, 2011. Interest income on fed funds sold decreased $15 thousand, or 51.7%, to $14 thousand as fed funds sold decreased $15.9 million at September 30, 2012. The decrease in fed funds sold was primarily used to fund the increase in the loan portfolio which increased $16.0 million to $298.0 million at September 30, 2012 from $282.0 million at September 30, 2011.

The average yield on loans decreased 47 basis points, to 4.86%, for the three months ended September 30, 2012 from 5.33% for the three months ended September 30, 2011. Total average loans increased $14.6 million to $295.0 million, reflecting an increase in the average balance of commercial loans of $24.8 million to $170.7 million for the three months ended September 30, 2012. The increase in average commercial loans was offset by a decrease in average residential mortgage loans of $4.3 million to $92.3 million and a decrease in average consumer loans of $5.9 million to $32.1 million for the three months ended September 30, 2012 as compared to $96.5 million and $38.1 million, respectively, for the three months ended September 30, 2011.

The average yield on securities decreased 21 basis points to 2.16% for the three months ended September 30, 2012 from 2.37% for the three months ended September 30, 2011, reflecting continued low market interest rates and repayments of higher yielding securities within the mortgage backed securities portfolio.

Interest Expense. Interest expense decreased $473 thousand to $637 thousand from $1.1 million for the three months ended September 30, 2012 and 2011, respectively. Deposit expense decreased by $404 thousand to $352 thousand for the three months ended September 30, 2012 as the average rate paid on deposits decreased 66 basis points to 0.60% for the three months ended September 30, 2012 from 1.26% for three months ended September 30, 2011.

Interest expense on borrowings decreased $69 thousand to $285 thousand for the three months ended September 30, 2012 from $354 thousand for the three months ended September 30, 2011. The average cost of borrowings decreased 14 basis points to 2.82% for the three months ended September 30, 2012 as a result of paying off higher costing term Federal Home Loan Bank advances.

Provision for Loan Losses. The Company's provision for loan losses for the three months ended September 30, 2012 was $112 thousand, a decrease of $35 thousand from $147 thousand for the three months ended September 30, 2011. For further discussion related to the provision for loan losses, see "Allowance for Loan Losses" in the "Comparison of Financial Condition at September 30, 2012 and June 30, 2012." For further discussions related to loan portfolio performance, see "Non-performing Assets" in the "Comparison of Financial Condition at September 30, 2012 and June 30, 2012" and Note 4 of the notes to the consolidated financial statements.


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Non-Interest Income. The following table summarizes changes in non-interest income:

                                            Three Months Ended
                                               September 30,                 Change
                                           2012            2011          $           %
                                              (In thousands)
  Customer service fees                  $      90       $      91     $  (1 )        (1.1 )%
  Loan servicing fees                            5               9        (4 )       (44.4 )
  Bank owned life insurance income              73              75        (2 )        (2.7 )
  Other non-interest income                     32              30         2           6.7

  Non-interest income before net gains         200             205        (5 )        (2.4 )
  Net gain on sale of loans                     -                6        (6 )      (100.0 )

  Net gains                                     -                6        (6 )      (100.0 )

  Total non-interest income              $     200       $     211     $ (11 )        (5.2 )

Total non-interest income decreased $11 thousand to $200 thousand for the three months ended September 30, 2012 as compared to $211 thousand for the three months ended September 30, 2011.

Non-Interest Expense. The following table summarizes changes in non-interest expense:

                                          Three Months Ended
                                             September 30,                Change
                                           2012          2011         $           %
                                            (In thousands)
       Salaries and employee benefits   $    1,770      $ 1,738     $  32          1.8 %
       Occupancy and equipment                 388          386         2          0.5
       Data processing                         197          177        20         11.3
       Directors' fees                          94           80        14         17.5
       FDIC assessments                         69           67         2          3.0
       Other non-interest expense              403          488       (85 )      (17.4 )

       Total non-interest expense       $    2,921      $ 2,936     $ (15 )       (0.5 )

Total non-interest expense remained relatively unchanged with a decrease of $15 thousand to $2.9 million for the three months ended September 30, 2012. Directors' fees increased $14 thousand, or 17.5%, to $94 thousand from $80 thousand for the three month periods ended September 30, 2012 and 2011, respectively. The increase is primarily due to addition of one new director in June 2011. Data processing expenses increased $20 thousand, or 11.3%, to $197 thousand for the three months ended September 30, 2012 as compared to $177 thousand for the three months ended September 30, 2011. The increase is primarily the result of increased licensing fees and processing costs. Other non-interest expense decreased $85 thousand to $403 thousand from $488 thousand for the three month periods ended September 30, 2012 and 2011, respectively. The decrease in other non-interest expense is primarily due to lower legal and professional fees, dues and licensing fees, and other operating expenses, and a decrease in miscellaneous losses.


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Income Taxes. The Company recorded income tax expense of $162 thousand for the three months ended September 30, 2012, reflecting an effective tax rate of 38.4%, compared to income tax expense of $14 thousand for the three months ended September 30, 2011, reflecting an effective tax rate of 13.7%. The lower effective tax rate for the three months ended September 30, 2011 as compared to September 30, 2012 is primarily the result of tax-exempt BOLI income representing a larger portion of pre-tax income. The difference from the effective tax rate to the statutory tax rate reflects the amount of income received from bank-owned life insurance, which is tax-exempt for federal and state tax purposes, relative to total pre-tax income for each period.

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